on whether a firm should acquire or form an alliance with another firm

depends on five key factors. Management should carefully consider the different kind of synergies between the two firms (modular, sequential, reciprocal), the nature of resources (soft versus hard; i.e., human resources versus

machines), the extent of redundant resources (potential for cost-cutting),

the degree of market uncertainty and the level of competition.

By illustrating their argument with an example from the banking industry,

Dyer et al., advise companies that have to generate synergies by combining

From their line of reasoning it can be inferred that the more industrialised

parts of the banking business (e.g., retail banking and the credit card business) are relatively more suitable for acquisition-driven growth strategies

than banking operations that are more dependent on a set of specialised

individuals (e.g., investment banking).

While size may be useful for realising economies of scale, some companies also enjoy absolute cost advantages which are independent of size.

According to Porter (Porter, 1979, 1980, 1998), this is the case in industries

where the learning and experience curves are pivotal. It also applies to companies with proprietary technology or a location which enables them to

access raw materials.

The emergence of so-called financial centres in the banking industry

results, among other things, from the importance of a pool of people with

particular expertise. The role of London as the dominant banking centre in

Europe can be partly attributed to the availability of skilled labour. In contrast, the more dispersed financial services industry in Germany could be

identified as one reason why Frankfurt seems to remain a second-tier financial city. In addition to an efficient and experienced financial community, a

financial centre has to provide economic and political stability, good communications and infrastructure and a regulatory environment that successfully protects investors’ rights without excessive capital market restrictions

Another barrier to entry is product differentiation according to Porter

(Porter, 1979, 1980, 1998). An established company may enjoy an immaculate reputation or have a recognised brand, which is associated by customers

with a specific service, quality or image. So, for a new entrant to overcome

existing customer loyalties carries a price. In addition, there can be significant switching costs, that is the financial cost to a customer of changing

supplier. As remarked by Porter “new entrants must offer a major improvement in cost or performance in order for the buyer to switch from an incumbent” (Porter, 1998, p. 10).

For retail clients, changing their bank accounts is a time-consuming

and inconvenient undertaking, which is not done quickly. Besides, a new

entrant to the retail banking market would have to build trust and attract

customers by offering better conditions as most retail clients have a personal relationship with the bank staff in their local branches and are concerned about their savings and the reliability of their financial transactions.

To some extent the same holds true for wholesale banking, particularly the

M&A advisory business, where it is common for new entrants without a

track record to significantly undercut market prices to attract “deals”.

Despite these considerations, it is argued that overall there is little product differentiation within the banking industry (Canals, 1993, p. 191).

Product differentiation in retail banking may take the form of an extensive

and sophisticated distribution network. Operating a large branch network

implies additional fixed costs, but it may also be perceived as an important

barrier to entry for potential competitors. As branches are also points of sale

for banks, this leads to the fourth barrier to entry, namely access to distribution channels (Porter, 1979, 1980, 1998). Prior to entering a new market,

a firm needs to consider ways of distributing its product. Thus, the costs of

accessing an adequate distribution network can pose such a financial burden on the company that it would have a competitive disadvantage. This

argument could partly explain the reluctance of most European banks to

enter the large German retail banking market.

Another important entry barrier in banking may originate from government policies and regulation. Governmental intervention can take many

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British and German Banking Strategies

forms, of which government subsidies, regulatory requirements and product standards are just a few. The structural differences and the favourable

refinancing conditions enjoyed by some banks (e.g., the German savings

banks) make it clear that government policies can be pivotal for an industry’s competitive environment.

One specific form of government policy which is identified as a distinct

claims that there are actually advantages in lateness. He argues that lateness enables new entrants to enjoy greater flexibility about their positioning. Therefore, they may be able to attack the incumbents’ weaknesses and

their lateness enables them to use the latest technological equipment, possibly negotiate better terms and conditions with suppliers, customers and

employees (Yip, 1982).

An example from the banking industry is the entry of ING Direct, the

online banking arm of the Dutch bancassurance firm ING, into various

European retail markets. Supported by large marketing campaigns and

attractive conditions for new clients ING Direct grew its deposits to EUR 197

billion with 15 million customers worldwide within a decade of its establishment in 1997. By avoiding any brick and mortar bank branches ING

Direct has been able to keep its CIR below that of most banks in the nine

countries in which it has a presence (ING Group, 2006).

3.4.3 Analysis of competition among established players in

a banking market

Closely related to an analysis of new entrants is an assessment of the level of

competition among the existing players. Some industries are characterised

by such intense competition that returns do not cover the cost of capital.

The more competitive an industry is, the less attractive it is as its profitability declines (Canals, 1993, p. 195).

Porter distinguishes between eight factors that essentially determine the

level of competition among established players in an industry: concentration, industry growth, cost structure, product differentiation, diversity of

share game for firms seeking expansion. Market share competition is a great

deal more volatile than is the situation in which rapid industry growth

44 British and German Banking Strategies

insures that firms can improve results just by keeping up with the industry

[...]” (Porter, 1998, p. 18).

As banks are operationally dependent on the macroeconomic environment in which they operate, their overall performance is a function of economic growth. The aforementioned threat of a sudden weakening of demand

for banking products is likely to be of particular concern for banks with relatively high CIRs. The reverse holds true for an economic upswing, which

should translate into a noticeable earnings boost for banks with a high proportion of fixed costs relative to variable costs. In that respect Porter’s final

point about large capacity jumps, which can have disruptive effects on the

industry’s supply/demand balance, could hold true for the banking industry

(Porter, 1998, p. 19).

3.4.4 The substitution problem for banking products and services

As described in the preceding paragraphs, companies which operate in

industries with attractive returns face the threat of new competitors entering, or at least trying to enter, the same industry. If the new entrants succeed, supply increases relative to demand, so overall profitability should

decline. On the other hand, an industry’s profitability can also come under

pressure if demand declines relative to supply. This is the case when a specific industry’s customers discover an alternative source of supply, that is if

their current needs can be satisfied through a substitute product or service.

Porter suggests that pressure from substitute products constitutes a distinct

threat for an industry (Porter, 1979, 1980, 1998).

The probability of customers seeking alternative solutions increases if the

price/quality relation is perceived as disproportionate. In other words,

“the price customers are willing to pay for a product depends, in part, on

(e.g., Fidelity Investments). If, however, these third-party funds are sold

through the bank, then the bank receives commission from the asset manager. For example, if HSBC sells a retail fund managed by US asset manager

Fidelity via one of its branches, HSBC will receive a fee from Fidelity, which

will be shown in its “commission income”.

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British and German Banking Strategies

Effectively, any investment (including deposit or savings accounts) that

is not managed by a bank can be regarded as a potential substitute. This

may range from such obvious investments as life insurance products or real

estate to expenses (investments) for education and training. The product

group least at risk of substitution in retail banking is the loan and mortgage

business as this requires the capacity (size for risk diversification) and technology for asset-liability management.

In wholesale banking, companies’ direct access to capital markets is the

most obvious substitute. Disintermediation, that is the substitution of bank

loans and deposits through direct interaction with other market participants, poses a threat to banks which only offer transformation services and

no transaction services. However, Bryan remarks that there are limits to

securitisation, which should ultimately allow banks to concentrate on a

kind of “residual transformation business” (Bryan, 1993). This core business is likely to comprise only transformation services for individual households and SMEs where the costs of securitisation exceed their value (Bryan,

1993).

Customers’ interest in substituting bank financing by capital market

financing have caused many banks to expand their service spectrum to

include capital market services. In some countries, like the United States of

America, this strategic shift had to be preceded by some legal changes, notably the Gramm-Leach-Bliley Financial Services Modernization Act of 1999

which repealed the Glass-Steagall Act of 1933.

If a bank offers transaction services in addition to transformation services,

its core competence stretches from mere asset-liability management skills to

corporate finance and capital markets expertise. The concept of a company’s

“core competence” is at the heart of Hamel and Prahalad’s resource-based

views (Hamel & Prahalad, 1990), which are discussed in Section 3.5.

Banks’ wholesale clients could also consider using insurance companies for certain services. Most importantly, insurance companies in the

field of asset management and corporate pension schemes could replace

banks. The imminent pressure on most European governments to promote funded pension schemes requires companies to offer their employees

retirement savings plans. The structural change in European demographics entails altered financing of provision for old age. This trend has contributed to the creation of bancassurance conglomerates, with Allianz/

Dresdner Bank and Lloyds TSB being the two most prominent cases in

Germany and Britain.

On the sales side, the scope for substitution of distribution to wholesale/

corporate clients appears limited as the corresponding banking products are

far more customer-specific than retail banking products, which tend to be

relatively standardised. However, some large consultancy companies have

made inroads on the strategic consulting of the M&A advisory business,